A Legislative Blueprint for Prescription Drug Reform

INTRODUCTION

Americans have the best access to cutting-edge prescription drugs, often receiving new treatments before any other country. This reflects an unspoken agreement: in exchange for early access, Americans accept higher prices on the condition that those prices eventually fall when generics become available. But Americans are increasingly dissatisfied with the cost of prescription drugs. While they recognize the value of life-saving innovations, 82 percent of Americans say prescription drugs cost too much, and 72 percent believe the government should do more to make them affordable.

To address the concerns of everyday Americans, FREOPP has developed a legislative blueprint for prescription drug reform. The blueprint’s solutions would bring better value to patients by increasing drug development for critical health problems affecting millions of Americans and making drugs more affordable. The blueprint starts with several drug reform provisions in the Fair Care Act (FCA)—legislation introduced by Rep. Bruce Westerman (R., Ark.). This legislation introduces reforms for various aspects of the prescription drug market: the patent system, the Food and Drug Administration (FDA), pharmacy benefit managers, and public and private payers. In addition to reforms in the FCA, the blueprint includes additional reforms to the patent system, reforms to the Medicare Drug Price Negotiation Program, and reforms to other aspects of federal drug payment. These commonsense reforms ought to appeal to members of both political parties.

By encouraging the development of life-saving treatments for the biggest public health problems, reining in spending on drugs that provide little value, and getting lower-cost generics and biosimilars to market sooner, the United States will remain the center of drug innovation at a price Americans can afford.

THE BLUEPRINT, PART I: THE FAIR CARE ACT

The Fair Care Act is a comprehensive, bipartisan bill for American health care reform. The bill would achieve universal insurance coverage through expansion of private insurance options, lower the costs of hospital and physician care, and reduce medical malpractice.

The bill also includes foundational prescription drug reforms in four general categories: patent reform, FDA reform, PBM reform, and payer reform.

Patent Reform

Prescription drug reform begins with reforming the patent system. Drug manufacturers use and abuse the patent system to maintain product monopolies for longer than policymakers intend, delaying patient access to lower-cost alternatives. The FCA addresses this issue by increasing patent transparency and curtailing abuses of the patent challenge process.

1. Pay-for-delay by generic firms. While branded drug manufacturers most often exhibit anticompetitive behavior to extend the exclusivity of their products, generic drug companies also engage in similar practices to block other generic competitors. One tactic generic manufacturers use is pay-for-delay, meaning the first-to-file generic company pays another company to delay launch of a competing generic product.
   
   This provision prohibits pay-for-delay and other anticompetitive behavior to prevent first to file generic firms from blocking other generic firms beyond the 180-day exclusivity period granted to the first generic firm.

2. Citizen petition reform. The FDA citizen petition allows individuals and organizations to make requests for changes in FDA policy. The citizen petition exists to give marginalized patients and advocacy groups the opportunity to bring issues related to patient safety to the FDA’s attention and to advocate for improved access to life-saving medications. However, the process is abused by branded drug manufacturers, resulting in suspect petitions intended to delay market entry of generic or biosimilar drugs.
   
   This provision reforms the citizen petition process by referring these suspect petitions to Federal Trade Commission for review. 

3. Biologic drug patent transparency. Biologic drug manufacturers often build a thicket of patents for various aspects of a drug, making it difficult for biosimilar drug makers to develop products without infringing on a reference product patent. This problem is made worse by the fact that branded manufacturers are not required by law to disclose such patents in the Purple Book, the database for all FDA-licensed biological products.
   
   This provision requires branded biologic firms to disclose patents in a timely and transparent manner in the Purple Book.

4. Ensuring timely access to generics. To obtain approval for a generic or biosimilar drug, manufacturers must obtain a sufficient quantity of reference product samples to verify a generic version is the same—or in the case of a biosimilar, substantially similar to—the chemical makeup of the reference product. Branded manufacturers sometimes delay generic or biosimilar competition by blocking access to the reference product needed for such clinical studies.
   
   This provision provides generic and biosimilar manufacturers with a new pathway to obtain injunctive relief in patent litigation, allowing them to bring lawsuits against branded drug manufacturers that block access to sufficient reference product samples necessary for the generic or biosimilar approval process.

FDA Reform

The FDA plays a critical role in assuring new drugs are both safe and effective. FDA approval grants drug companies the right to exclusively market a drug, functioning as an additional layer of intellectual property protection with patents.

Yet FDA policies and practices often increase the cost of drug development and distort company incentives that affect what types of drugs they develop. Reforms should streamline approval of drugs that address the biggest public health problems, hold drug companies accountable for conducting confirmatory trials that prove drug efficacy, and speed-up access to lower-cost generics and biosimilars.

1. Conditional approval of promising drugs. Research shows that lower drug development costs fuel innovation. But research and development for pharmaceuticals continues to climb, and FDA processes often further delay drug approvals longer than necessary. In addition, the FDA’s accelerated approval pathway is flawed, providing little accountability of drug companies that obtain such approval but do not follow through on providing confirmatory trial data to prove a drug is effective.
   
   The FCA includes legislative language from the Promising Pathway Act, which provides for an expedited FDA approval pathway for new drugs to treat rare or serious life-threatening diseases. The act would allow drug manufacturers to apply for up to three two-year renewals for the approved product, on condition that the manufacturer makes progress in providing additional clinical or observational data to prove the drug’s efficacy.
   
   However, we recommend that Congress amend this provision to remove the requirement that drugs approved through the new pathway must be included on public and private formularies.
   
2. Harmonize FDA exclusivity of small molecule and biologic drugs. The Drug Price Competition and Patent Term Restoration Act, more commonly known as Hatch-Waxman, established five years of marketing exclusivity after FDA approval of small molecule drugs, which have low molecular weight and are typically in pill or capsule form. By contrast, the Biologics Price Competition and Innovation Act established 12 years of marketing exclusivity after FDA approval of biologics, which are drugs with high molecular weight developed by living cells, and are typically in injectable form. While the longer period of exclusivity for biologics may have made sense in the technology’s infancy, 12 years of exclusivity is no longer justified in today’s mature biotech industry. This excessively skews drug development toward more expensive biologic products.
   
   This provision would reduce marketing exclusivity granted for biologics from 12 years to five years, the same amount of time afforded to small molecule drugs.
   
3. State preemption of biosimilars. The FDA designates certain biosimilar drugs as interchangeable with a reference biologic product under certain conditions. An interchangeable designation signals to the medical community that the biosimilar can be prescribed with confidence that the product will achieve the same results with the same safety profile as the biologic. However, instances exist when state law precludes automatic substitution of a biosimilar for the reference biologic, confusing pharmacists and denying patient access to lower-cost treatments.
   
   This provision would provide clarity to pharmacies by preempting state law on the treatment of interchangeable biosimilars, establishing the uniform federal policy that all biosimilars with an interchangeable designation may be automatically substituted at the pharmacy in the same way as generic small molecule drugs.
   
4. Biosimilar interchangeability. To receive an interchangeable designation on a biosimilar product, biosimilar manufacturers must undergo additional studies, including switching studies. These studies provide evidence that a biosimilar has the same therapeutic effects and safety profile as a reference biologic.
   
   This provision would designate all biosimilars as interchangeable with the reference product, allowing for automatic substitution of biosimilars for biologics at the pharmacy.
   
5. Priority review of complex generic drug applications. Certain drug products that operate as a combination drug product or require complex delivery systems may struggle to obtain FDA approval, delaying lower-cost options for patients.
   
   This provision empowers the HHS secretary to develop alternative and flexible approaches to expedite approval of such products.
   
6. Rare disease exclusivity. The FDA awards seven-year marketing exclusivities for drugs with orphan drug—i.e., rare disease—indications. Drug manufacturers may stack these seven-year exclusivities for drugs with multiple orphan drug indications.
   
   This provision limits that practice by granting a seven-year exclusivity for the first orphan drug indication, and a maximum of one additional three-year exclusivity for a second orphan drug indication.
   
7. Expanding fast-track approval. The FDA can approve innovative drugs through a fast-track process if the drug product treats an unmet need: a disease or condition that cannot be treated with existing drugs. But there are often situations in which there is an “undermet” need, in which only one or two drugs exist to treat a disease or condition.
   
   This provision expands fast-track approval for drugs that treat an undermet need, thereby increasing price competition among a small group of possible treatments.
   
8. Excluding biologics from official compendia. The United States Pharmacopeia (USP) is a nonprofit organization that maintains compendium standards for pharmacists to aid in the preparation and compounding of medicines. However, the compendium was originally drafted to apply to small molecule drugs, and sometimes hinders the licensure of biosimilar products.
   
   This provision exempts biological products from requirements to follow USP compendial standards, preventing delay of approval of biosimilar and interchangeable products.
   
9. Prompt drug approval based on safety. The FDA prevents generic drug manufacturers from including safety information on product labeling that is protected by the branded drug’s exclusivity. This policy leads to delays in generic product approval.
   
   This provision gives the FDA broader authority to approve follow-on or generic products by allowing such safety information to be included on generic product labeling. 
   
10. Government Accountability Office study. Congress has given broad discretion to the FDA to perform its activities. As a result, many of the FDA’s functions are governed by rules and regulations promulgated by the FDA. 
    
    This provision requires the Comptroller General of the United States to conduct a study, within one year of enactment, of the number of rules and major rules in effect at the FDA, and the economic cost imposed by such rules.
    
11. Congressional approval of major FDA changes. Traditionally, the FDA has broad discretion to fulfill its congressional mandate to examine the safety and benefit of drug products, medical devices, foods, and food additives. With this autonomy comes the risk that the FDA may act contrary to Congress’ intent.
    
    This provision stipulates that Congress vote on all major FDA actions that are expected to have an economic impact of $100 million or more, with congressional approval granted by a simple majority of both houses.

PBM Reform

Pharmacy Benefit Managers (PBMs) play an important role in controlling drug costs by acting as an intermediary between drug manufacturers, insurance plans, and employers to negotiate lower drug costs and to process drug claims.

However, PBMs also engage in practices that are not always aligned with the patients and health plans they are supposed to serve. Congress has proposed several reforms to increase transparency into PBM business models and to rein-in practices that favor the sale of certain drugs, drive-up costs, and disadvantage smaller pharmacies.

1. PBM drug pricing transparency. The biggest role of PBMs is to negotiate discounts with drug manufacturers. PBMs often use formularies as leverage to extract larger discounts in exchange for favorable placement on the formulary that encourages higher sales. But the negotiation process is also opaque and confidential, which may lead to dealmaking that favors the PBMs’ financial interests above the interests of patients, employers, and health plans.
   
   This provision requires PBMs to regularly update payers on drug pricing methods used in negotiations with manufacturers.
   
2. PBM quarterly reports. PBMs historically lack transparency in business operations, in particular in how they negotiate with drug manufacturers and the array of fees PBMs make throughout the process. The opaque nature of PBM financial operations is worsened by the fact that employers are an additional intermediary between PBMs and patients they are supposed to serve.
   
   This provision requires PBMs to submit quarterly reports to plan sponsors on fees, rebates, and other details of PBM contracts.
   
3. Rebates to commercial payers. Though PBMs often negotiate substantial discounts with drug manufacturers in the form of rebates, these rebates do not always return in full to the price patients pay. Some of the rebate may be retained by the PBM, insurance company, or employer sponsoring the insurance plan.
   
   This provision eliminates rebates to commercial payers unless rebates are reflected transparently as an equal discount at the point of sale, prohibits spread pricing, and ensures a flat-fee structure for services rendered by the PBM.
   
4. Remuneration fees and pharmacy contracts. PBMs engage in other anticompetitive behaviors, including levying retroactive fees and forcing payment reductions on retail pharmacies after claims are processed,known as direct and indirect remuneration (DIR) fees, as well as forcing patients to use only pharmacies that the PBM owns.
   
   This provision prohibits the use of DIR fees and bans PBMs from requiring Medicare Part D plans to use pharmacies that the PBM owns.

Payer Reform

Since drug manufacturers set prices as high as possible for their products, public and private insurers need the tools to effectively negotiate prices down to reasonable levels on behalf of patients. Congress should prioritize reforms that give both public and private insurers greater leverage. Allowing insurers to negotiate as one entity and test alternative payment models would be a great start.

1. Joint insurer negotiations. Prescription drug benefits vary greatly between different insurance plans, both in the public and private sectors. As such, the power to negotiate lower prices with branded drug companies is diffuse, giving drug companies an advantage in negotiations. Antitrust laws prohibit insurance companies from banding together to jointly negotiate lower prices.
   
   This provision creates a safe harbor from antitrust liability for insurers to jointly negotiate drug manufacturers on prices and formulary access.
   
2. Drug company contributions to patient out-of-pocket payments. Drug manufacturers market patient financial assistance programs—often in the form of co-pay assistance cards—to help pay the out-of-pocket cost of expensive drugs. In addition, these programs are often designed to prevent insurance companies from crediting the patient with progress toward their out-of-pocket maximum from co-pays paid by the drug manufacturer. This process short-circuits the intent of insurance cost-sharing and further shields patients from the true cost of drugs, enabling manufacturers to raise prices further.
   
   This provision authorizes HHS to regulate financial contributions from drug manufacturers, such as co-pay assistance.
   
3. Medicare Part D coverage adjustments. Prior to 2024, Medicare Part D drug plans featured a complicated array of cost-sharing arrangements that placed some seniors at risk of high out-of-pocket drug costs and limiting access to potentially life-saving treatments. The program was redesigned under the Inflation Reduction Act (IRA) to, among other things, cap total annual out-of-pocket drug costs to $2,000. However, these changes also led to rising claims cost by Part D plans while largely shielding seniors from the true cost of drugs.
   
   This provision modifies the current Part D cost-sharing structure, appropriately balancing lower out-of-pocket costs for seniors with strengthening Part D finances to stabilize premiums. 
   
4. Market-based international price index. Most developed countries pay much lower prices for prescription drugs than the United States, especially for branded drugs with no generic or biosimilar competition. This places a larger burden on Americans relative to other countries. The Trump administration issued an executive order to establish a most favored nation (MFN) pricing model, with the intent of bringing United States drug prices in line with the rest of the world.
   
   This provision authorizes the HHS secretary to establish an MFN pricing model through a market-based international pricing index. The index would determine whether relevant countries set drug prices using government price controls or free market mechanisms, and would place a greater emphasis on market prices when calculating an indexed price.
   
5. Medicare integrated drug benefit pilot. While seniors get most prescription drugs through a Part D drug plan or one integrated with Medicare Advantage, some drugs are administered through the Part B physician benefit or the Part A hospital benefit, with different reimbursement rules and payment procedures. These varying methods lead to unnecessary administrative costs and confusion.
   
   This provision authorizes the HHS secretary to test a model that integrates drug benefits administered under Medicare Parts A, B, and D.

THE BLUEPRINT, PART II: BEYOND THE FCA

While the Fair Care Act is a great start to reforming America’s prescription drug market, Congress can do more to make the system work for patients. Several bills introduced in Congress would reform various aspects of the patent system as well as speed up access to cost-saving biosimilars. In addition, we offer Medicare reforms that give the Centers for Medicare and Medicaid Services (CMS) and drug plans more power to negotiate for lower drug prices, particularly for drugs that have been on the market for a long time or provide little additional value over lower-cost treatments.

Robust Patent Reform

1. Patent thickets. Novel prescription drugs are primarily protected by a patent on the drug’s composition. However, drug manufacturers apply for patents on other facets of a drug, including the drug’s method of delivery, disease indications, and manufacturing processes used to make the drug. Some manufacturers successfully built a thicket by applying for as many as nearly 250 patents around blockbuster drugs. And once a manufacturer establishes a patent thicket around the drug, it becomes nearly impossible for generic or biosimilar manufacturers to successfully challenge the drug’s patents.
   
   This provision limits the number of patents a biologic manufacturer could assert in litigation, subject to certain exemptions. Specifically, the provision limits the number of asserted patents to no more than 20, with no more than 10 of those having been filed more than four years after the reference product received marketing approval.
   
2. Product hopping. Sometimes brand-name drug manufacturers seek to shift demand from a reference product that will face generic competition to a modified or reformulated version of the drug that enjoys longer patent protection. Drug manufacturers use this technique to stifle generic or biosimilar competition and to keep prices artificially high.
   
   This provision prohibits the practice of product hopping if a manufacturer has engaged in unfair competition. Specifically, the provision would prohibit a “hard switch,” which occurs when two conditions are met: (1) the manufacturer withdraws or discontinues the manufacture of a reference product, or destroys the inventory of a reference product, in a manner that impedes competition from a generic drug or a biosimilar biological product; and (2) the manufacturer markets or sells a follow-on product. The provision also prohibits a “soft switch,” which occurs when a manufacturer takes actions that otherwise create an unfair advantage for the follow-on product over the reference product and actively markets or sells the follow-on product.
   
3. Coordination between USPTO and FDA. Congress recently identified instances in which manufacturers are reporting different information, or withholding information altogether, from the U.S. Patent and Trademark Office (USPTO) and the FDA to gain patent or exclusivity protections that are inconsistent with the law. 
   
   This provision requires the USPTO and the FDA to share information and to ensure manufacturer disclosures are consistent with both agencies so that issued patents are legally valid and to prevent the patenting of incremental and obvious changes.
   
4. USPTO funding. The patent system is subjective, with even the most sincere USPTO officials making misjudgements about whether a patent application should be approved. These mistakes occur, in part, because the USPTO lacks resources to effectively scrutinize each patent application for drug products. On average, patent examiners spend about 18 hours per drug patent application, while recent studies show that more time spent on applications would be a cost-effective way to reduce the issuance of weak patents.
   
   This provision increases funding for USPTO specifically to apply greater scrutiny of drug patents. The funding consists of a separate appropriation from Congress to supplement USPTO’s user fee funding mechanism.
   
5. Strengthen drug patent challenges at PTAB. Generic and biosimilar manufacturers need a fair, predictable path to challenge weak patents and develop alternatives. The American Invents Act, enacted in 2011, established the Patent Trial and Review Board (PTAB) to quickly handle patent validity challenges. But the process is flawed and bars certain entities from challenging the validity of patents.
   
   This provision allows government entities like the CMS and the Federal Trade Commission to challenge weak patents.

Medicare Drug Price Negotiation Program Reform

The Medicare Drug Price Negotiation Program was established under the Inflation Reduction Act of 2022. The program authorizes CMS to select a number of drugs each year to negotiate lower prices and goes into effect in 2026. Since CMS is negotiating with affected companies for drugs with prices going into effect in 2027, the following reforms would affect negotiated drug prices beginning in 2028. 

The reforms listed below are described in more detail in our recently published paper here.

1. Drug selection based on net savings over expected term of exclusivity. Under current law, negotiation-eligible drugs are placed in a list of the top 50 drugs, ordered by highest gross expenditures in the prior one-year period. CMS then selects a number of drugs from this list based on the number of drugs permitted for the initial pricing year, as stipulated in statute: 10 drugs for 2026, 15 drugs for 2027 and 2028, and 20 drugs each year for 2029 and beyond.
   
   This provision orders the top 50 negotiation-eligible drugs based not on gross expenditures, but based on the highest possible net savings over each drug’s remaining years of exclusivity. It creates an independent commission within CMS to collect data from drug manufacturers, with the commission drafting a report for each pricing year that orders the top 50 drugs based on net savings over a 10-year horizon. CMS still retains regulatory flexibility to choose drugs farther down the list if certain conditions warrant such selection.
   
2. Increasing annual number of drugs selected. CMS selects a certain number of the highest ranked drugs on the list of negotiation-eligible drugs, as defined by law. 
   
   This provision increases the number of drugs for negotiation from 15 to 20 in 2028, and from 20 to 25 each year from 2029 onward. 
   
3. Replacing selected drugs after generic competitor launches. The IRA stipulates that once CMS determines a generic or biosimilar version of a selected drug is marketed, the selected drug drops off the list of drugs with negotiated prices based on a timeline outlined in CMS guidance.
   
   This provision allows CMS to replace a drug that has a generic or biosimilar marketed. The selection of a replacement drug is added to the number of drugs required for selection each year. The replacement drug would be added to the list of selected drugs for the earliest year in which it is practicable.
   
4. Increasing mandatory minimum discounts. CMS must negotiate discounts that are at least as large as percentage discounts outlined in law. For drugs that have been marketed for 12 years or fewer when negotiated prices go into effect, the minimum discount CMS must seek is 25 percent less than the drug’s non-federal average manufacturer price (non-FAMP). Over time, the percentage discount ramps up to as high as 60 percent off the non-FAMP for drugs on the market longer than 16 years.
   
   This provision would increase the percentage discount of the non-FAMP for selected drugs as follows: 40 percent for drugs marketed 12 years or less, 60 percent for drugs marketed between 12 and 16 years, and 80 percent for drugs marketed for 16 years or more.
   
5. Include international prices as a factor in negotiation. Statute and program guidance precludes CMS from considering certain factors in price negotiations, including prices paid for the same drugs in other countries. In general, CMS begins with the average net price of therapeutic alternatives to the selected drug as a starting point in formulating an initial offer.
   
   This provision explicitly requires CMS to consider prices paid in other developed countries as a factor in setting price offers. The MFN model would give greater weight to prices in countries that use free-market pricing mechanisms for prescription drugs. The provision directs CMS to use the MFN model’s price as a starting point for negotiations, unless the price is higher than the IRA’s statutory price ceiling.
   
6. Harmonize treatment of small molecule and biologic drugs. CMS selects drugs for negotiation only when small molecule drugs have been on the market for at least seven years, or biologic drugs have been on the market for at least 11 years at the time of selection.
   
   This provision reduces the time that biologics can be selected from 11 years to seven years.
   
7. Give drug plans the power to exclude negotiated drugs. Many drugs CMS selected for negotiation or may select in the future are currently excluded from coverage on some Part D drug plans. Once a final negotiated price is agreed upon by CMS and drug manufacturers, Medicare drug plans are required to include the drug on their formularies and must pay manufacturers the price negotiated by CMS. While drug plans can still negotiate additional rebates to reduce drug prices below the negotiated price, the IRA’s prohibition on excluding selected drugs from formularies reduces leverage drug plans need to negotiate additional rebates.
   
   This provision repeals the IRA’s requirement that selected drugs be included on all drug plan formularies.

Other Improvements

1. Medicare Part B drug reimbursement. Medicare pays for physician-administered drugs through the Part B physician benefit. By law, Medicare pays the average sales price in the commercial market for the drug, plus a six percent dispensing fee. This formula incentivizes providers to dispense higher-cost drugs.
   
   This provision gives the HHS secretary discretion to develop an alternative to the current reimbursement formula.
   
2. Medicare Part B and Medicaid curated formularies. Medicare and Medicaid cover virtually any drug approved by the FDA, regardless of cost. Furthermore, CMS has rarely used its authority to exclude drugs paid by Medicaid or the Medicare Part B physician benefit that have poor value or limited evidence of efficacy.
   
   This provision empowers CMS to establish formularies for Medicaid and Medicare Part B to exclude drugs that do not provide sufficient value.
   
3. Medicare Part D protected classes. Medicare drug plans are required to cover certain drugs that belong to “protected classes” of drugs such as drugs to treat cancer or HIV/AIDS.
   
   This provision eliminates protected classes in Medicare, which are no longer necessary to ensure enough treatments in each treatment group and would increase insurance company leverage to negotiate lower prices.

PUTTING PATIENTS FIRST

While the United States enjoys the earliest access to new life-saving drug treatments in the world, Americans also pay a steep price. Nearly three out of 10 Americans forgo medications because of cost, and millions more do not have financial access to treatments at all.

The legislative blueprint outlined here would significantly reduce the cost of treatments while also reducing the cost to develop new ones. Congress should use this blueprint to pass comprehensive prescription drug reform to encourage drug innovation at an affordable price for patients and taxpayers.